Fitch upgrades national long-term rating of PABC Bank

Fitch Ratings Lanka has upgraded the national long-term rating of PABC Bank to 'BBB-(lka)' (BBB minus (lka)) from 'BB+(lka)'.

The upgrade of the rating recognises improvements in PABC's profitability and relative improvements in its capitalisation ratios and asset quality since the bank was first rated by Fitch in 2005. The rating, however, is constrained by the current level of solvency and high sectoral concentrations in the credit portfolio, Fitch said. PABC's profitability has steadily improved due to lower credit costs and expanding net interest margins, which increased to 5.3% in FY06 from 4.8% in FY05. Consequently, the bank's return on assets (ROA) increased to a strong 1.4% in FY06 from 1.1% in FY05, which is higher than the national average.
Fitch said PABC's loan book has significant concentration in the export-import and wholesale-retail trading sectors, which altogether accounted for 49.4% of the loan book at FYE06. This exposes the bank to a somewhat elevated level of risk, considering that the trading sector would be among the first to be affected in the event of an economic downturn. However, Fitch said such risk is mitigated to a certain extent by the small size of the average loan exposure.

The infusion of fresh equity in FY06 to meet the minimum capital requirement of Rs 2.5 billion imposed by the Central Bank of Sri Lanka (CBSL) propped up absolute equity to Rs 1.235 billion. CBSL has now extended the deadline to meet this enhanced minimum capital requirement to 2009 from end-2007 for all banks, subject to the submission of a capital infusion plan to the regulator.

Accordingly, PABC has submitted and obtained regulatory approval. Given PABC's scale of operations and resulting profitability, the agency believes that meeting this requirement by end-2009 would require a further infusion of equity, Fitch said.